OTHER EQUIPMENT/PROPERTY, DEPRECIATION, OFFICE EXPENSES

Section 179 Deduction

The Section 179 deduction allows you to fully deduct certain qualifying property in the year purchased, rather than depreciate it over many years as would ordinarily be required (for capital assets). Generally, if you purchased tangible property for business use and placed it into service, subject to certain exceptions, you may be allowed to deduct up to $1,000,000 in 2018 and beyond in the year you incurred the expense. Section 179 can be applied to vehicles, office furniture and equipment, certain software costs and capital improvements made to your business property, amongst other things. Entrepreneurs who invest in business property can realize significant tax savings from taking advantage of the Section 179 deduction. Note however that you likely will not be eligible for this deduction if you purchase assets for a residential rental property.

PHOTOGRAPHER

Kenny is a seasoned freelance photographer. On January 1 he spent $3,500 on a new camera to be used in his business and started using it immediately. Rather than depreciate the asset and only deduct a portion of the cost in the current year, he listed the asset in Part I of Form 4562 and elected to deduct the full cost of the camera. Kenny then deducted the full $3,500 he paid for his camera on line 13 of his Schedule C.

UBER DRIVER / RIDESHARE

Louie has always wanted more flexibility in his life so last year he decided to start driving for Lyft full time. He purchased a new car for $22,000 to use in his ride share business. He began using the car immediately and can attribute 80% of the miles logged to his business activities. Since this purchase meets the requirements for the Section 179 deduction, Louie elected to expense all $22,000 of his vehicle purchase price, which offset a significant portion of his first year taxable income. Note however that since he made the Section 179 election on his vehicle he cannot deduct his auto expenses using the standard mileage rate in any year -- he must always deduct his auto expenses using the actual method.

LANDLORD / AIRBNB HOST

Starr owns a vacation property that she rents out regularly on VBRO. On January 1, she renovated her vacation home and purchased $12,000 of new furniture and appliances. Unfortunately, Starr would not be allowed to take the Section 179 deduction on these assets since they would not meet the business use requirement of the election. Further, assets purchased to furnish most lodgings are disallowed under Section 179.

PROFESSIONAL SERVICES

Hillary is a sole proprietor lawyer who specializes in international mergers and acquisitions. She is based in New York but has a satellite office in Tokyo. During the year she spent $8,000 on a new server that she placed into service in her Tokyo office. Unfortunately, since the asset is not being used in the United States she will be unable to make the Section 179 election and will instead be required to depreciate this asset over the standard five year recovery period.

REAL ESTATE AGENT

Tom is a Tulsa, Oklahoma based real estate agent. At the beginning of the year Tom purchased $3,000 of new office furniture for his home office, however, shortly after it arrived he hurt his back and was not able to assemble it before the end of the year. Even though Tom paid for the items during the current year, he would not be able to take the Section 179 deduction for his office furniture since he did not place it into service during the year.

THINGS TO CONSIDER WHEN DEDUCTING OFFICE FURNITURE

  • You can take the Section 179 deduction if you purchase and place into service tangible personal property, other tangible property (buildings used for manufacturing, production or certain research activities and some other property excluded), off the shelf computer software and qualified real property, amongst other things. Note that if you did not purchase and put into use the aforementioned property or if you purchased the property from a relative, you are not eligible for the deduction.
  • In 2018 you can deduct up to $1,000,000 of qualifying property. Note however that your Section 179 deduction for certain SUV's and larger vehicles may be limited.
  • If you purchase and place into service over $2,500,000 of qualifying 179 property during the year, your $1,000,000 section 179 deduction will decrease dollar for dollar by the amount of cost over $2,500,000, until the deduction phases out completely at $3,500,000. Additionally, your deduction is limited to your total taxable income (excluding Section 179, self employment tax, net operating losses and unreimbursed expenses) from the any trade or business.
  • Even if you purchased business property that could be eligible for the Section 179 deduction, you cannot take the deduction if any of the following apply to the property you purchased: it will be leased to others, it will be used furnish lodging (applies to owners of residential rental properties), it is an HVAC unit, it will be used by certain tax exempt organizations, government organizations or foreign persons / entities, or it will be used outside the United States. Refer to IRS guidance for specific details surrounding the aforementioned exclusions.
  • To claim the section 179 deduction on your qualifying property you simply need to elect what property you want to claim the deduction for in Section I of Form 4562. Amounts are then reported on line 13 of your Schedule E. Keep in mind that if you are going to elect to expense c property under Section 179 you should have records supporting who you acquired your property from, how you acquired the property, how much you paid, when you placed the property into service
  • While the concept of the Section 179 deduction is straightforward there are many details behind the high level information we have outlined on this page. Additionally, there are a number of Section 179 topics we do not cover. You should refer to IRS guidance and consult with your tax advisor to determine how this election can apply to you.

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